6.1 Flashcards
Equilibrium interest rates
required rate of return for a particular investment, in the sense that the market rate of return is the return that investors and savers require to get them to willingly lend their funds
real risk-free rate of interest
theoretical rate on a single-period loan that has no expectation of inflation in it.
nominal risk-free rate
real risk-free rate + expected inflation rate
Default risk.
The risk that a borrower will not make the promised payments in a timely manner.
Liquidity risk
The risk of receiving less than fair value for an investment if it must be sold for cash quickly.
Maturity risk.
the prices of longer-term bonds are more volatile than those of shorter-term bonds. Longer maturity bonds have more maturity risk than shorter-term bonds and require a maturity risk premium.
effective annual rate (EAR) or effective annual yield (EAY).
The rate of interest that investors actually realize as a result of compounding
EAR = (1 + periodic rate)m − 1
periodic rate = stated annual rate/m
Future Value of a Single Sum
FV = PV(1 + I/Y)N
annuity
stream of equal cash flows that occurs at equal intervals over a given period.
ordinary annuities
cash flows that occur at the end of each compounding period
annuities due
receipts occur at the beginning of each period
perpetuity
financial instrument that pays a fixed amount of money at set intervals over an infinite period of time. In essence, a perpetuity is a perpetual annuity. Most preferred stocks are examples of perpetuities since they promise fixed interest or dividend payments forever. Without going into all the excruciating mathematical details, the discount factor for a perpetuity is just one divided by the appropriate rate of return (i.e., 1/r). Given this, we can compute the PV of a perpetuity.
cash flow additivity principle
present value of any stream of cash flows equals the sum of the present values of the cash flows.
Descriptive statistics
summarize the important characteristics of large data sets. The focus of this topic review is on the use of descriptive statistics to consolidate a mass of numerical data into useful information.
Inferential statistics
procedures used to make forecasts, estimates, or judgments about a large set of data on the basis of the statistical characteristics of a smaller set (a sample).